Market News & Insights
19 February 2018

Roller Coaster Dollar Ride Set To Continue

The dollar made a slight comeback on Friday with positive housing and consumer confidence figures following a rough week after a higher than expected inflation figure. The U.S. currency has been weighed down by a variety of factors this year, including concerns that Washington might pursue a weak dollar strategy and the perceived erosion of its yield advantage as other countries start to scale back easy monetary policy. Confidence in the dollar has also been shaken by mounting worries over the U.S. budget deficit which is projected to balloon to $1 trillion in 2019 amid a government spending splurge and large corporate tax cuts. While these negative factors were not expected to go away any time soon, last week’s downturn was so rapid that some buyers were seen to have waded in to pick up the greenback at perceived bargains. A chance at further redemption this week in the form of existing home sales out Wednesday, as well as the release of FOMC minutes from its last meeting, later that evening. The Federal Reserve shifted its stance to a somewhat more hawkish one on its January 31st meeting, the last rate decision presided by Janet Yellen. The meeting minutes are edited until the very last moment, so the tone may reflect a message that the Fed would like to convey, even if the minutes document an event that happened three weeks ago, before the “stock market crash” and recovery. We will learn how much the Fed really believes that inflation is set to rise and perhaps we can learn about the path of rate hikes.

Yesterdays’ Sunday papers were full of the latest Brexit update’s (or lack of) from Boris’s bizarre Valentines battle cry to citizens’ rights during the transition period, with us no closer to understanding what the landmark decision will look like post breaking away for either side. One would imagine nothing will change on that front for the foreseeable future either. Sterling meanwhile has enjoyed a positive run since the start of the year which should be further reinforced this week with a number of releases including jobs report and UK GDP. On the jobs report the Bank of England has shifted to a hawkish stance, noting that rates may rise at a quicker pace than had been anticipated. Inflation has also remained stubbornly high at 3% y/y. But what about wages? The average hourly earnings component of the jobs report remains the primary detail. It is expected to remain at 2.5% y/y in December. The unemployment rate carries expectations for staying unchanged at 4.3% in December while the Claimant Count Change carries expectations for a small rise of 2.3K in January after 8.6K beforehand. A big jump in the latter figure may steal the show from wages if they remain unchanged.

Wednesday also sees the release of the ECB minutes from January’s meeting where the European Central Bank left its policy unchanged. They also refrained from providing any guidance on the next steps in the QE program. The minutes from that meeting will likely convey the same old message: good growth, but low inflation. A focus on growth could send the euro higher while a focus on inflation would send it lower. Any talk about changing the communication, hinting about the end of QE, would help push the euro higher.